Cheema, M. A., & Scrimgeour, F. (2018). Oil prices and Stock Market anomalies. Presented at the New Zealand Finance Meeting 2018, Queenstown, New Zealand.
Abstract
This paper examines the relationship between oil prices and stock market anomalies in China, the largest oil importer country in the world. Prior literature documents both a positive and negative relationship between oil prices and the stock market. The explanation of a positive relationship is supported by the argument that rising oil prices are interpreted as a positive signal by investors. Consequently, rising oil prices lead stock prices above their fundamental values and that they subsequently correct. Therefore, we hypothesise that stock market anomalies are stronger following rising oil prices since returns associated with anomalies reflect mispricing. The results, consistent with the hypothesis, show stronger return predictability for individual anomalies following an increase in oil prices than for a decrease in oil prices. The results are even stronger once we construct a mispricing score based on composite mispricing of all the anomalies.
